I think it's highly misleading for anyone in the bitcoin community to use the words bank, insured, trust account, deposit account or escrow account. This is really aimed at rational bitcoin citizens that are accustomed to the western style reserve banking financial systems; I think a more appropriate term to describe these entities would be unregulated broker, unregulated lender, or even wholesale broker. Bank is the word of the day, the others, I might discuss another day. But all of these words share a common element, they are used by regulated entities to mean very specific things.
Banks can only function, when they are trusted. Normal western style banks will fight to maintain a high level of customer service and honor all withdrawals. You probably didn't read the real world bank deposit agreement, but In the fine print, their is usually a statement requiring prior written notification on amounts that would pose a danger to the normal operations of the real world bank. But in practice, this is rarely enforced, because delaying or dishonoring a withdraw, will result in a loss of what they value most, trust.
A real world bank, will try to maintain that trust, even when faced with the prospect of more withdrawals than liquid cash (ie cash on hand, cash in the cash vault), they will make every effort to honor all the withdrawal the same day. They will request the product(yes they call cash the product) from the reserve bank. But that will never be the case for the bitcoin community, since it's virtual currency with no central banking operation. If satoshi was an economist, he would probably cry if he saw the word bank used to describe something in the bitcoin world. I tend to think he was a idealist coder, and didn't really understand the complexities of the finance world.
To make money, banks take short term deposits, and lend the funds out for longer terms, the interest differential is the profit. But there is an inherit problem for banks when loans default above the anticipated default rate. Also, when a real world bank faces the prospect of more withdrawals than available funds in liquid electronic accounts, they will take overnight loans from another bank. When they are shut out of the interbank lending market, the real world bank will approach a discount window at the reserve bank (in secret usually). For these reasons, a western bank usually has to earn a license, and is regulated to ensure it has the privilege of accessing the discount window. I think we should all consider the use of the word bank to describe an entity in the bitcoin community an abusive brain teaser.
Pretty much all lending operations in the bitcoin world that pay interest on short term deposits, at any given time may face more withdrawal requests than available funds - each and every one of these lending operations should be considered by definition a ponzi scheme. Anyone that pays a high yield on a short term deposit, in the bitcoin world needs to be labeled as a ponzi scheme - just to make folks aware of the risk. In other words, they are taking money, and returning a fraction as interest without the backing of an interlending market and/or reserve window. It's customers may face a situation where they can't get their money back, when they want it - not when the bank says they can have it. If the intention of the entity was honorable but described themselves as a bank or used the word deposit in their operations; it was naive to think their customer's won't make a comparison to ponzi scheme - if they can't honor a withdrawal request.
It's self-righteous to blame the customer, when the entity can't honor a valid withdrawal request on a short term deposit.
In the past, it's been fairly easy to grab a low-rate intralender loan in the cartel room way below market rates to cover depositor requests when necessary. It's been extremely difficult lately, though, because Pirate's pervaded into almost the entire Bitcoin economy. We all knew how pervasive it was and I had strong words against it at first, but when people pop up personally guaranteeing (falsely, in many cases, it seems) something like 2.5%/wk and we can't assimilate them into the cartel to get agreements together, the only way to be competitive for deposits is to try matching or dramatically out-innovating them. The Vegas event inspired a lot of confidence with me, too. In most cases, we individually chose easy, impatient methods of competing with guaranteed PPTs, and while innovations like IOUcoin.com and co-lender guarantees on deposits have been in the works, couldn't be pushed out fast enough. We fell way short, Pirate ended up being in almost everyone's portfolio, depositors left after fear came about from Pirate's default/collapse, and now there are liquidity problems just about everywhere.
We'll try to cover Imsaguy's debt (he's the only current cartel member who's defaulted, AFAIK -- I haven't checked on HK, though) and work out an agreement with him and his depositors (incidentally, his main problem also wasn't a loss on Pirate [though that eliminated his liquid reserves -- Pirate's program was very attractive in that it wasn't a "hard" fixed-term like many CD offerings], and his problems can largely be availed just by purchasing his BTC debt, "locking" it into USD, and stomping the interest rate down until he can breathe again). Pat has funds to back what he's lent out personally. I can cover everything I owe. Burt can cover everything he owes. James, AmazinRando, and the like aren't experiencing TOO severe of liquidity problems, ATM, AFAIK. I don't think AR did lending - he was just there so we could help fund. JG doesn't often lend, either, but I think he may've had Pirate exposure, which I haven't looked into how much affects him. payb.tc, Goat, and some others (ciciu, vescurdo, and obviously dank) aren't in the cartel, so I don't watch whatever they may be doing, and have much less interest organizing a way to cover whatever they may owe since I don't know them nearly as well as people I talk to every day. We lack a reporting process for depositors who were unable to withdraw what/when they were entitled to, and that makes keeping tabs on everyone a bit difficult. That'll eventually be resolved. We've talked about explicitly insuring each other (individually) off-and-on, but with Pirate pervasiveness, I've never wanted to offer it in the more public cartel room, and I never came to agreements with individual lenders, so we all operated without outside backing - and with Pirate pervasiveness, it would have been useless in many situations because both lenders are going to be experiencing liquidity problems whether they're directly exposed to Pirate or not.
This is a systemic problem, not isolated to any single lender. Everyone's experiencing troubles right now, and since intra-lender loans have dried up, there're also no solutions to helping depositors get principal if they request it outside of calling in loans at a loss of previously-accrued interest (I don't think any lender has "hard" calls in loan contracts - so we offer to waive interest if they pay us principal). In a way, this environment's challenge is kind of fun, but of course, it needs to be treated with the sense of urgency it deserves, as most people did only do short-term fixed deposits. Back when the cartel had maybe five people in it, we talked a little about a collaborative bond to keep us symbiotic and less cannibalistic... it's unfortunate collaborative bonds turned out to be PPT bonds.
There's a lot of anger, now, but it'll pass. We'll have time to think about correcting fundamental problems again, but there'll be this event to point to, demanding we come up with solutions now rather than later, putting a little more enthusiasm in the solution-finding process, I'd think. We'll see. It's ultimately still a fun, experimental process, and we're learning as we go along. Pat's place is in energy consultancy. I was an administrative clerk. Mark's in some type of non-combat role over in Afghanistan (I think he might be back - I heard him mention TWC being slower than satellite over there). Nick... Idunno what Nick does, honestly, aside from drawing a decent salary. Burt's an engineer and plays hockey. HK's a landlord. None of us have a particularly full background in finance. Hell - I just read a textbook by Mishkin, looked at the lending sub-forum and thought "why not?"
On a related note... people looking to fix us might have interest being in the cartel to prod us into finding solutions, and helping find those solutions. I'd be eager to have you in.
